BECO1000 Principles of Microeconomics (010), 2023/2024-1

Assignment 2 (due November 30, 2023 in class)

Name: _____________________________________ Student no. ________________________

⚫ The assignment may be completed individually or in a group with a maximum of 3 students.

⚫ Submit a hard copy of the assignment (one for each group).
⚫ Give brief and concise explanation, show all steps in calculation, and label your diagrams clearly.

Question 1 2 3 4 Total
Score / 25 / 17 / 30 / 28 / 100

Question One: Consumer choice

1. Sara’s income is $12 a week. The price of popcorn is $3 a bag, and the price of cola is $1.50 a can.
The figure below shows Sara’s preference map for popcorn and cola.

(a) Draw the budget line of Sara in the above diagram and label it BL0. The real income of Sara in terms
of cola is ________________________________________________________________________.
The opportunity cost of 1 can of cola is _________________________________________________.
( __________ / 3%, 3%)
(b) Sara chooses to buy ____________________ popcorn and __________________ cola because
_________________________________________________________________________________
________________________________________________________________________________.
At this consumption choice point, Sara’s marginal rate of substitution is
_________________________________________________________________________________.
( ______________ / 3%, 3%, 4%, 3%)
(c) Suppose that the price of cola rises from $1.50 to $3.00 a can while the price of popcorn and Sara’s
income remain the same. Draw the new budget line on the same diagram in (a) and label it BL1. Sara

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 chooses to buy ____________________ popcorn and __________________ cola.
( ______________ / 3%, 3%)

Question Two: Long run cost

Jackie’s Canoe Rides rents canoes at $100 per day and pays $50 per day for each canoe operator it hires.
The table below shows the firm’s total product in terms of rides per day for each plant size.

Labor Plant 1 (10 canoes) Plant 2 (20 canoes) Plant 3 (30 canoes) Plant 4 (40 canoes)

(workers TP1 ATC1 TP2 ATC2 TP3 ATC3 TP4 ATC4

per day) (rides) ($) (rides) ($) (rides) ($) (rides) ($)

10 20 40 55 65

20 40 60 75 85

30 65 75 90 100

40 75 85 100 110

(a) Calculate the average total cost of production for each plant size. ( ___ / 4%)

(b) Graph the average total cost of production curve for each plant size on the same diagram. ( ___ / 4%)

(c) Indicate clearly Jackie’s long run average cost of production curve in the diagram in (b). ( ___ / 3%)

(d) Jackie’s minimum efficient scale is ____________________. ( ___ / 3%)

(e) Explain the underlying reason for the shape of the long run average cost of production that you have
obtained. ( ___ / 3%)
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
________________________________________________________________________________
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Question Three: Perfect competition
Pat’s Pizza Kitchen is a price taker and the table below shows its cost of production.
Output Total cost Average variable cost Average total Marginal cost
(pizzas per hour) ($ per hour) ($ per pizza) cost ($ per additional
($ per pizza) pizza)
0 10
_____
1 21 _____ _____
_____
2 30 _____ _____
_____
3 41 _____ _____
_____
4 54 _____ _____
_____
5 69 _____ _____

(a) Complete the table above, and graph the AVC, ATC and MC curves in the same diagram. ( ___ / 10%)

(b) If the market price is $14 a pizza, draw the marginal revenue curve in the diagram in (a). Pat’s profit-
maximizing output is _______________________________ and profit is
______________________________________________________________. ( _________ / 3%, 3%)

(c) Pat’s shutdown price is _______________________________, and at this point, profit equals
____________________________________________________________________. ( ___ / 3%, 3%)

(d) Derive the supply schedule of Pat and therefore the market supply schedule, supposing that there are
999 other firms that are identical to Pat’s. ( ___ / 2%, 2%)

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 Price ($ per pizza) Pat’s quantity supplied Market quantity supplied
9 _____ _____
10 _____ _____
12 _____ _____
14 _____ _____

(d) Draw Pat’s supply curve and the market supply curve separately below. ( ___ / 2%, 2%)

Question Four: Monopoly

Minnie’s Mineral Springs is a single-price monopoly. Columns 1 and 2 of the table set out the market
demand schedule for Minnie’s water and columns 2 and 3 set out Minnie’s total cost schedule.
Price Quantity demanded Total cost Marginal revenue Marginal cost
($ per bottle) (bottles per hour) ($ / hour) ($ / additional bottle) ($ / additional bottle)
10 0 1
_____ _____
8 1 3
_____ _____
6 2 7
_____ _____
4 3 13
_____ _____
2 4 21
_____ _____
0 5 31

(a) Fill in the blanks above and draw the market demand curve, Minnie’s MR and MC curves together
on the same diagram below. ( ___ / 3%, 5%)
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(b) Minnie’s profit maximizing output level is _________________ and the profit maximizing price is
____________________. The profit equals ____________________________________. ( ___ / 9%)

(c) If marginal cost pricing is adopted, the market price would be ______________________________
and the output level at __________________________________. Comparing single-price monopoly
and marginal cost pricing, ________________________________________ (single-price monopoly
/ marginal cost pricing) is inefficient with deadweight loss as illustrated by the shaded area in your
diagram in (a). ( ______________________________ / 3%, 3%, 2%, 3%)